For the majority of online travel agents, payments represent nothing more than a necessary evil; it?s widely accepted that getting paid costs money, and most merchants are prepared to leave it at that. However, by taking the time to understand why these costs exist, and by asking acquirers the right questions, businesses have the potential to significantly drive down their payments expenditure.
Whilst there are many direct and indirect fees that exist within the travel payments arena, this article will focus on one of the most significant yet misunderstood elements - interchange fees.
What are interchange fees and why do they exist?
Interchange fees, also referred to as issuer fees, are set by the card schemes (Mastercard and Visa) and exist predominantly to cover the cost of developing and maintaining the complex systems which support and process card transactions. These fees are paid by the acquirer, to the issuer, per transaction, and the costs are passed down to the merchant as part of their MSC (merchant service charge).
Interchange fees have been something of a controversial topic in recent years, due to a lack of transparency and understanding around fee structures, and the varying charges travel agents incur from their respective acquirers every time a transaction is processed. The interchange fee passed down to merchants has traditionally varied significantly, depending on a complex criteria set by the card schemes (including whether a card was present or not for the transaction, for example) and the terms set out by the acquirer at the start of a relationship - unfortunately, not always to the benefit of the merchant.
Much changed in 2015 when the European Parliament and the Council of the European Union adopted the Interchange Fee Regulation (IFR). The primary objective of the IFR is to provide merchants and their customers with greater clarity around credit and debit card payments, by capping interchange fees on domestic card transactions made inside the European Economic Area (EEA). This cap currently sits at 0.3% for credit card transactions, and 0.2% for debit card.
For the majority of merchants, a capped fee structure is favourable as it essentially limits the amount they have to pay per transaction - CMSpi estimated UK merchants could save as much as ?650m per year as a result - but the model of an online travel agent is hugely different from an average online retailer, so the same can not be said in most cases.
Prior to the IFR rollout, debit card transactions were charged on a flat pence-per-fee basis, which was beneficial for large transaction industries including travel. However, with the introduction of IFR and the percentage-of-transaction model, travel agents will generally be worse off, as fees increase alongside the transaction amount - the higher the transaction, the bigger the fee. In contrast, travel agents may end up paying less on credit card interchange fees, because they were already charged as percentage prior to IFR - the fee cap simply means they won't pay over the 0.3%, which they may have been previously.
That said, how much a travel agent ends up paying in total rests entirely on the pricing model adopted by the acquirer, which did, and still do vary to some degree.
There are essentially three main pricing structures associated with interchange fees; blended, interchange +, and interchange ++. A blended structure makes for more simplified billing, but it is also the least transparent and therefore has potential to be the most costly. A blended structure combines all components of card transaction fees, including interchange fees, into one charge, making it difficult for merchants to identify whether interchange fee savings are being passed on or absorbed by the acquirer.
Interchange +, on the other hand, is a transparent pricing structure that splits out the different components of card processing costs for clear reporting, which allows merchants to make more informed decisions about their payments solutions. Interchange ++ is the same as Interchange +, but also identifies the scheme fee element of each transaction charge.
In wake of IFR, merchants on blended structures should be particularly cautious, as they are most susceptible to overcharging. The key perspective from a regulatory compliance perspective is that Interchange ++ pricing is the most transparent of all three fee structures, and most representative of IFR legislation ethos.
It?s good to talk
Travel agents who bury their head in the sand over interchange fees run a real risk of missing out on the benefits of IFR, and any potential profits gained as a result of the fee cap. To help mitigate against the rising costs of payment acceptance, travel agents should speak regularly with their merchant acquirers to ensure they are not overpaying for interchange fees, or indeed any other payments charges.
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